[Federal Register Volume 76, Number 51 (Wednesday, March 16, 2011)]
[Rules and Regulations]
[Pages 14543-14547]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-5552]


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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 1, 2, 7, 16, 32, 42, and 50

[FAC 2005-50; FAR Case 2008-030; Item I; Docket 2011-0082, Sequence 1]
RIN 9000-AL78


Federal Acquisition Regulation; Proper Use and Management of 
Cost-Reimbursement Contracts

AGENCIES: Department of Defense (DoD), General Services Administration 
(GSA), and National Aeronautics and Space Administration (NASA).

ACTION: Interim rule with request for comments.

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SUMMARY: DoD, GSA, and NASA are issuing an interim rule amending the 
Federal Acquisition Regulation (FAR) to implement section 864 of the 
Duncan Hunter National Defense Authorization Act for Fiscal Year 2009. 
This law aligns

[[Page 14544]]

with the Presidential Memorandum on Government Contracting, issued on 
March 4, 2009, which directed agencies to save $40 billion in 
contracting annually by Fiscal Year (FY) 2011 and to reduce the use of 
high-risk contracts. This rule provides regulatory guidance on the 
proper use and management of other than firm-fixed-price contracts 
(e.g., cost-reimbursement, time-and-material, and labor-hour).

DATES: Effective Date: March 16, 2011.
    Comment Date: Interested parties should submit written comments to 
the Regulatory Secretariat on or before May 16, 2011 to be considered 
in the formulation of a final rule.

ADDRESSES: Submit comments identified by FAC 2005-50, FAR Case 2008-
030, by any of the following methods:
     Regulations.gov: http://www.regulations.gov. Submit 
comments via the Federal eRulemaking portal by inputting ``FAR Case 
2008-030'' under the heading ``Enter Keyword or ID'' and selecting 
``Search.'' Select the link ``Submit a Comment'' that corresponds with 
``FAR Case 2008-030.'' Follow the instructions provided at the ``Submit 
a Comment'' screen. Please include your name, company name (if any), 
and ``FAR Case 2008-030'' on your attached document.
     Fax: (202) 501-4067.
     Mail: General Services Administration, Regulatory 
Secretariat (MVCB), ATTN: Hada Flowers, 1275 First Street, NE., 7th 
Floor, Washington, DC 20417.
    Instructions: Please submit comments only and cite FAC 2005-50, FAR 
Case 2008-030, in all correspondence related to this case. All comments 
received will be posted without change to http://www.regulations.gov, 
including any personal and/or business confidential information 
provided.

FOR FURTHER INFORMATION CONTACT: For clarification of content, contact 
Lori Sakalos, Procurement Analyst, at (202) 208-0498. For information 
pertaining to status or publication schedules, contact the Regulatory 
Secretariat at (202) 501-4755. Please cite FAC 2005-50, FAR Case 2008-
030.

SUPPLEMENTARY INFORMATION:

I. Background

    This case implements section 864 of the Duncan Hunter National 
Defense Authorization Act for Fiscal Year 2009 (Pub. L. 110-417), 
enacted October 14, 2008. This law aligns with the President's goal of 
reducing high-risk contracting as denoted in the March 4, 2009, 
Presidential Memorandum on Government Contracting.
    Section 864 requires the FAR to be revised to address the use and 
management of cost-reimbursement contracts and identifies the following 
three areas that the Defense Acquisition Regulation Council and the 
Civilian Agency Acquisition Council (Councils) should consider in 
amending the FAR--
    (a) Circumstances when cost-reimbursement contracts are 
appropriate;
    (b) Acquisition plan findings to support the selection of a cost-
reimbursement contract; and
    (c) Acquisition resources necessary to award and manage a cost-
reimbursement contract.
    1. Guidance on Cost-reimbursement contracts. As required, the 
Councils included additional coverage at FAR subpart 16.1, Selecting 
Contract Types, and at subpart 16.3, Cost-Reimbursement Contracts, to 
provide further guidance as to when, and under what circumstances, 
cost-reimbursement contracts are appropriate. Therefore, this rule 
makes the following changes:
     FAR 16.103, Negotiating contract type, is amended to 
revise paragraph (d) to reflect additional documentation when other 
than a firm-fixed-price contract type is selected.
     FAR 16.104, Factors in selecting contract types, is 
amended to add a new paragraph (e) to provide guidance to the 
contracting officer to consider combining contract types if the entire 
contract cannot be firm fixed-price.
     FAR 16.301-2, Application, is amended to provide guidance 
to the contracting officer as to the circumstances in which to use 
cost-reimbursement contracts as well as outlining the rationale for 
documentation for selecting this contract type.
     FAR 16.301-3, Limitations, is amended to (1) provide 
additional guidance to the contracting officer as to when a cost-
reimbursement contract may be used, (2) ensure that all factors have 
been considered per FAR 16.104, and (3) ensure that adequate Government 
resources are available to award and manage this type of contract.
     FAR 7.104(e) also requires the designation of a properly 
trained contracting officer's representative (COR) (or contracting 
officer's technical representative (COTR)) prior to award of the 
contract or order.
    2. Identification of acquisition plan findings. FAR 7.103, Agency-
head responsibilities, is amended and renumbered to add new paragraphs 
7.103(d), 7.103(f), and 7.103(j) to ensure that acquisition planners 
document the file to support the selection of the contract type in 
accordance with FAR subpart 16.1; ensure that the statement of work is 
closely aligned with the performance outcomes and cost estimates; and 
obtain an approval and signature from the appropriate acquisition 
official at least one level above the contracting officer. FAR 
7.105(b)(5)(iv) was added to discuss the strategy to transition from 
cost-reimbursement contracts to firm-fixed-price contracts. Although 
FAR 7.105(b)(5), Acquisition considerations, requires the acquisition 
plans to include a discussion of contract type selection and rationale, 
the Councils believe that a greater emphasis on the use of cost-
reimbursement contracts should be added and included a new paragraph at 
FAR 7.105(b)(3), Contract type selection. Additionally, FAR 16.301-3(a) 
has been amended and renumbered.
    3. Acquisition workforce resources. The Councils recognize that 
assigning adequate and proper resources to support the solicitation, 
award, and administration of other than firm-fixed-price contracts 
(cost-reimbursement, time-and-material, and labor-hour) contract is 
challenging. There is also great concern that a lack of involvement in 
contract oversight by program offices is primarily present in other 
than firm-fixed-price contracts. Therefore, from the outset, 
contracting officers should be assured, to the greatest extent 
practicable, that the right resources in number, kind, and availability 
be assigned to support other than firm-fixed-price contracts. The 
Councils consider that greater accountability for the management and 
oversight of all contracts, especially other than firm-fixed-price 
contracts, can be gained and improved by requiring that properly 
trained CORs or COTRs (see FAR 2.101(b)(2), Definitions) be appointed 
before award. Therefore, FAR 7.104, General Procedures, and FAR 16.301-
3(a)(4)(i) are amended to reflect that prior to award of a contract, 
especially on other than firm-fixed price contracts, at least one COR 
or COTR qualified in accordance with FAR 1.602-2 is designated. FAR 
1.602-2, Responsibilities, is amended to add a new paragraph (d) 
outlining the requirement for the contracting officer to designate and 
authorize, in writing, a COR on contracts and orders, as appropriate. 
Additionally, a new section was added at FAR 1.604, Contracting 
officer's representative, outlining the COR's duties.
    4. Contract administration functions. A new paragraph was added at 
FAR 42.302(a)(12) to require that the contracting officer determine the 
continuing adequacy of the contractor's

[[Page 14545]]

accounting system during the entire period of contract performance. 
Also, paragraph (a)(12) was added to the list of functions at FAR 
42.302(a) that cannot be retained and that must be delegated by the 
contracting officer when delegating contract administration functions 
to a contract administration office in accordance with FAR 42.202(a).

II. Executive Order 12866

    This is a significant regulatory action and, therefore, was subject 
to review under Section 6(b) of Executive Order 12866, Regulatory 
Planning and Review, dated September 30, 1993. This rule is not a major 
rule under 5 U.S.C. 804.

III. Regulatory Flexibility Act

    DoD, GSA, and NASA do not expect this interim rule to have a 
significant economic impact on a substantial number of small entities 
within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, et 
seq., because section 864 affects only internal Government operations 
and requires the Government to establish internal guidance on the 
proper use and management of all contracts especially other than firm-
fixed-price contracts (e.g., cost-reimbursement, time-and-material, and 
labor-hour) and does not impose any additional requirements on small 
businesses.
    Therefore, an Initial Regulatory Flexibility Analysis has not been 
performed. DoD, GSA, and NASA invite comments from small business 
entities and other interested parties on the expected impact of this 
rule on small entities.
    DoD, GSA, and NASA will also consider comments from small entities 
concerning the existing regulations in subparts affected by the rule in 
accordance with 5 U.S.C. 610. Interested parties must submit such 
comments separately and should cite 5 U.S.C. 610 (FAC 2005-50, FAR Case 
2008-030) in correspondence.

IV. Paperwork Reduction Act

    The changes to the FAR do not impose information collection 
requirements that require the approval of the Office of Management and 
Budget under the Paperwork Reduction Act (44 U.S.C. chapter 35).

V. Determination To Issue an Interim Rule

    A determination has been made under the authority of the Secretary 
of Defense (DoD), the Administrator of General Services (GSA), and the 
Administrator of the National Aeronautics and Space Administration 
(NASA) that urgent and compelling reasons exist to promulgate this 
interim rule without prior opportunity for public comment. This action 
is necessary because section 864 of the Duncan Hunter National Defense 
Authorization Act for Fiscal Year 2009, enacted October 14, 2008, 
directs that it must be implemented within 270 days from enactment. 
This rule is also urgent because this law requires the Inspector 
General to conduct a compliance review for each executive agency, one 
year after the regulations have been promulgated, on the use of cost-
reimbursement contracts and include the results of their findings in 
the IG's next semiannual report. However, pursuant to 41 U.S.C. 1707 
and FAR 1.501-3(b), DoD, GSA, and NASA will consider public comments 
received in response to this interim rule in the formation of the final 
rule.

List of Subjects in 48 CFR Parts 1, 2, 7, 16, 32, 42, and 50

    Government procurement.

    Dated: March 4, 2011.
Millisa Gary,
Acting Director, Office of Governmentwide Acquisition Policy Division.

    Therefore, DoD, GSA, and NASA amend 48 CFR parts 1, 2, 7, 16, 32, 
42, and 50 as set forth below:

0
1. The authority citation for 48 CFR parts 1, 2, 7, 16, 32, 42, and 50 
continues to read as follows:

    Authority: 40 U.S.C. 121(c); 10 U.S.C. chapter 137; and 42 
U.S.C. 2473(c).

PART 1--FEDERAL ACQUISITION REGULATIONS SYSTEM

0
2. Amend section 1.602-2 by adding paragraph (d) to read as follows:


1.602-2  Responsibilities.

* * * * *
    (d) Designate and authorize, in writing, a contracting officer's 
representative (COR) on all contracts and orders other than those that 
are firm-fixed price, and for firm-fixed-price contracts and orders as 
appropriate. However, the contracting officer is not precluded from 
retaining and executing the COR duties as appropriate. See 7.104(e). A 
COR--
    (1) Must be a Government employee, unless otherwise authorized in 
agency regulations;
    (2) Shall be certified and maintain certification in accordance 
with the Office of Management and Budget memorandum entitled ``The 
Federal Acquisition Certification for Contracting Officer Technical 
Representatives'' dated November 26, 2007, or for DoD, DoD Regulations, 
as applicable;
    (3) Must be qualified by training and experience commensurate with 
the responsibilities to be delegated in accordance with department/
agency guidelines;
    (4) May not be delegated responsibility to perform functions that 
have been delegated under 42.202 to a contract administration office, 
but may be assigned some duties at 42.302 by the contracting officer;
    (5) Has no authority to make any commitments or changes that affect 
price, quality, quantity, delivery, or other terms and conditions of 
the contract; and
    (6) Must be designated in writing, with copies furnished to the 
contractor and the contract administration office--
    (i) Specifying the extent of the COR's authority to act on behalf 
of the contracting officer;
    (ii) Identifying the limitations on the COR's authority;
    (iii) Specifying the period covered by the designation;
    (iv) Stating the authority is not redelegable; and
    (v) Stating that the COR may be personally liable for unauthorized 
acts.

0
3. Amend section 1.603 by revising the section heading to read as 
follows:


1.603  Selection, appointment, and termination of appointment for 
contracting officers.

* * * * *

0
4. Add section 1.604 to read as follows:


1.604  Contracting Officer's Representative (COR).

    A contracting officer's representative (COR) assists in the 
technical monitoring or administration of a contract (see 1.602-2(d)). 
The COR shall maintain a file for each assigned contract. The file must 
include, at a minimum--
    (a) A copy of the contracting officer's letter of designation and 
other documents describing the COR's duties and responsibilities;
    (b) A copy of the contract administration functions delegated to a 
contract administration office which may not be delegated to the COR 
(see 1.602-2(d)(4)); and
    (c) Documentation of COR actions taken in accordance with the 
delegation of authority.

PART 2--DEFINITIONS OF WORDS AND TERMS

0
5. Amend section 2.101 in paragraph (b)(2) by adding, in alphabetical 
order, the definition ``Contracting officer's representative (COR)'' to 
read as follows:

[[Page 14546]]

2.101  Definitions.

* * * * *
    (b) * * *
    (2) * * *
    Contracting officer's representative (COR) means an individual, 
including a contracting officer's technical representative (COTR), 
designated and authorized in writing by the contracting officer to 
perform specific technical or administrative functions.
* * * * *

PART 7--ACQUISITION PLANNING

0
6. Amend section 7.102 by adding paragraph (a)(3) to read as follows:


7.102  Policy.

    (a) * * *
    (3) Selection of appropriate contract type in accordance with part 
16.
* * * * *

0
7. Amend section 7.103 by--
0
a. Redesignating paragraphs (e) through (w) as paragraphs (g) through 
(y);
0
b. Redesignating paragraph (d) as paragraph (e);
0
c. Adding a new paragraph (d);
0
d. Revising newly redesignated paragraph (e);
0
e. Adding a new paragraph (f); and
0
f. Revising newly redesignated paragraph (j).
    The added and revised text reads as follows:


7.103  Agency-head responsibilities.

* * * * *
    (d) Ensuring that acquisition planners document the file to support 
the selection of the contract type in accordance with subpart 16.1.
    (e) Establishing criteria and thresholds at which increasingly 
greater detail and formality in the planning process is required as the 
acquisition becomes more complex and costly, including for cost-
reimbursement and other high-risk contracts (e.g., other than firm-
fixed-price contracts) requiring a written acquisition plan. A written 
plan shall be prepared for cost reimbursement and other high-risk 
contracts other than firm-fixed-price contracts, although written plans 
may be required for firm-fixed-price contracts as appropriate.
    (f) Ensuring that the statement of work is closely aligned with 
performance outcomes and cost estimates.
* * * * *
    (j) Reviewing and approving acquisition plans and revisions to 
these plans to ensure compliance with FAR requirements including 7.104 
and part 16. For other than firm-fixed-price contracts, ensuring that 
the plan is approved and signed at least one level above the 
contracting officer.
* * * * *

0
8. Amend section 7.104 by adding paragraph (e) to read as follows:


7.104  General procedures.

* * * * *
    (e) The planner shall ensure that a COR is nominated by the 
requirements official, and designated and authorized by the contracting 
officer, as early as practicable in the acquisition process. The 
contracting officer shall designate and authorize a COR as early as 
practicable after the nomination. See 1.602-2(d).

0
9. Amend section 7.105 by--
0
a. Removing from the first sentence of the introductory text the words 
``see paragraph (b)(19)'' and adding the words ``see paragraph 
(b)(21)'' in their place;
0
b. Redesignating paragraphs (b)(3) through (b)(21) as paragraphs (b)(4) 
through (b)(22), respectively;
0
c. Adding a new paragraph (b)(3);
0
d. Removing from newly redesignated paragraph (b)(5)(i) the words 
``contract type selection (see part 16);'';
0
e. Removing from newly redesignated paragraph (b)(5)(ii)(A) the words 
``see 7.103(t)'' and adding the words ``see 7.103(v)'' in its place; 
and
0
f. Adding paragraph (b)(5)(iv).
    The added text reads as follows:


7.105  Contents of written acquisition plans.

* * * * *
    (b) * * *
    (3) Contract type selection. Discuss the rationale for the 
selection of contract type. For other than firm-fixed-price contracts, 
see 16.103(d) for additional documentation guidance. Acquisition 
personnel shall document the acquisition plan with findings that detail 
the particular facts and circumstances, (e.g., complexity of the 
requirements, uncertain duration of the work, contractor's technical 
capability and financial responsibility, or adequacy of the 
contractor's accounting system), and associated reasoning essential to 
support the contract type selection. The contracting officer shall 
ensure that requirements and technical personnel provide the necessary 
documentation to support the contract type selection.
* * * * *
    (5) * * *
    (iv) For each contract (and order) contemplated, discuss the 
strategy to transition to firm-fixed-price contracts to the maximum 
extent practicable. During the requirements development stage, consider 
structuring the contract requirements, e.g., contract line items 
(CLINS), in a manner that will permit some, if not all, of the 
requirements to be awarded on a firm-fixed-price basis, either in the 
current contract, future option years, or follow-on contracts. This 
will facilitate an easier transition to a firm-fixed-price contact 
because a cost history will be developed for a recurring definitive 
requirement.
* * * * *

PART 16--TYPES OF CONTRACTS

0
10. Amend section 16.103 by revising paragraphs (d)(1) and (2) to read 
as follows:


16.103  Negotiating contract type.

* * * * *
    (d) * * *
    (1) Each contract file shall include documentation to show why the 
particular contract type was selected. This shall be documented in the 
acquisition plan, or if a written acquisition plan is not required, in 
the contract file.
    (i) Explain why the contract type selected must be used to meet the 
agency need.
    (ii) Discuss the Government's additional risks and the burden to 
manage the contract type selected (e.g., when a cost-reimbursement 
contract is selected, the Government incurs additional cost risks, and 
the Government has the additional burden of managing the contractor's 
costs). For such instances, acquisition personnel shall discuss--
    (A) How the Government identified the additional risks (e.g., pre-
award survey, or past performance information);
    (B) The nature of the additional risks (e.g., inadequate 
contractor's accounting system, weaknesses in contractor's internal 
control, non-compliance with Cost Accounting Standards, or lack of or 
inadequate earned value management system); and
    (C) How the Government will manage and mitigate the risks.
    (iii) Discuss the Government resources necessary to properly plan 
for, award, and administer the contract type selected (e.g., resources 
needed and the additional risks to the Government if adequate resources 
are not provided).
    (iv) For other than a firm-fixed price contract, at a minimum the 
documentation should include--
    (A) An analysis of why the use of other than a firm-fixed-price 
contract (e.g., cost reimbursement, time and materials, labor hour) is 
appropriate;
    (B) Rationale that detail the particular facts and circumstances 
(e.g.,

[[Page 14547]]

complexity of the requirements, uncertain duration of the work, 
contractor's technical capability and financial responsibility, or 
adequacy of the contractor's accounting system), and associated 
reasoning essential to support the contract type selection;
    (C) An assessment regarding the adequacy of Government resources 
that are necessary to properly plan for, award, and administer other 
than firm-fixed-price contracts; and
    (D) A discussion of the actions planned to minimize the use of 
other than firm-fixed-price contracts on future acquisitions for the 
same requirement and to transition to firm-fixed-price contracts to the 
maximum extent practicable.
    (v) A discussion of why a level-of-effort, price redetermination, 
or fee provision was included.
    (2) Exceptions to the requirements at (d)(1) of this section are--
    (i) Fixed-price acquisitions made under simplified acquisition 
procedures;
    (ii) Contracts on a firm-fixed-price basis other than those for 
major systems or research and development; and
    (iii) Awards on the set-aside portion of sealed bid partial set-
asides for small business.
* * * * *

0
11. Amend section 16.104 by--
0
a. Redesignating paragraphs (e) through (k) as paragraphs (f) through 
(l), respectively;
0
b. Adding a new paragraph (e);
0
c. Removing from newly redesignated paragraph (f) the words 
``incentives to ensure'' and adding the words ``incentives tailored to 
performance outcomes to ensure'' in their place;
0
d. Removing from newly redesignated paragraph (g) the words ``price 
adjustment terms'' and adding the words ``price adjustment or price 
redetermination clauses'' in their place; and
0
e. Revising newly redesignated paragraph (i).
    The added and revised text reads as follows:


16.104  Factors in selecting contract types.

* * * * *
    (e) Combining contract types. If the entire contract cannot be 
firm-fixed-price, the contracting officer shall consider whether or not 
a portion of the contract can be established on a firm-fixed-price 
basis.
* * * * *
    (i) Adequacy of the contractor's accounting system. Before agreeing 
on a contract type other than firm-fixed-price, the contracting officer 
shall ensure that the contractor's accounting system will permit timely 
development of all necessary cost data in the form required by the 
proposed contract type. This factor may be critical--
    (1) When the contract type requires price revision while 
performance is in progress; or
    (2) When a cost-reimbursement contract is being considered and all 
current or past experience with the contractor has been on a fixed-
price basis. See 42.302(a)(12).
* * * * *

0
12. Revise section 16.301-2 to read as follows:


16.301-2  Application.

    (a) The contracting officer shall use cost-reimbursement contracts 
only when--
    (1) Circumstances do not allow the agency to define its 
requirements sufficiently to allow for a fixed-price type contract (see 
7.105); or
    (2) Uncertainties involved in contract performance do not permit 
costs to be estimated with sufficient accuracy to use any type of 
fixed-price contract.
    (b) The contracting officer shall document the rationale for 
selecting the contract type in the written acquisition plan and ensure 
that the plan is approved and signed at least one level above the 
contracting officer (see 7.103(j) and 7.105). If a written acquisition 
plan is not required, the contracting officer shall document the 
rationale in the contract file. See also 16.103(d).

0
13. Amend section 16.301-3 by revising paragraph (a) to read as 
follows:


16.301-3  Limitations.

    (a) A cost-reimbursement contract may be used only when--
    (1) The factors in 16.104 have been considered;
    (2) A written acquisition plan has been approved and signed at 
least one level above the contracting officer;
    (3) The contractor's accounting system is adequate for determining 
costs applicable to the contract; and
    (4) Adequate Government resources are available to award and manage 
a contract other than firm-fixed-priced (see 7.104(e)) including--
    (i) Designation of at least one contracting officer's 
representative (COR) qualified in accordance with 1.602-2 has been made 
prior to award of the contract or order; and
    (ii) Appropriate Government surveillance during performance to 
provide reasonable assurance that efficient methods and effective cost 
controls are used.
* * * * *

PART 32--CONTRACT FINANCING


32.1007  [Amended]

0
14. Amend section 32.1007 by removing from paragraph (a) ``(see 
42.302(a)(12))'' and adding ``(see 42.302(a)(13))'' in its place.

PART 42--CONTRACT ADMINISTRATION AND AUDIT SERVICES

0
15. Amend section 42.302 by--
0
a. Removing from the introductory text of paragraph (a) the words 
``paragraphs (a)(5), (a)(9), and (a)(11)'' and adding the words 
``paragraphs (a)(5), (a)(9), (a)(11), and (a)(12)'' in their place;
0
b. Redesignating paragraphs (a)(12) through (a)(26) as paragraphs 
(a)(13) through (a)(27); and
0
c. Adding a new paragraph (a)(12) to read as follows:


42.302  Contract administration functions.

    (a) * * *
    (12) Determine the adequacy of the contractor's accounting system. 
The contractor's accounting system should be adequate during the entire 
period of contract performance. The adequacy of the contractor's 
accounting system and its associated internal control system, as well 
as contractor compliance with the Cost Accounting Standards (CAS), 
affect the quality and validity of the contractor data upon which the 
Government must rely for its management oversight of the contractor and 
contract performance.
* * * * *

PART 50--EXTRAORDINARY CONTRACTURAL ACTIONS AND THE SAFETY ACT


50.205-1  [Amended]

0
16. Amend section 50.205-1 by removing from the first sentence in 
paragraph (b) the words ``(see FAR 7.105(b)(19)(v))'' and adding the 
words ``(see 7.105(b)(20)(v))'' in their place.

[FR Doc. 2011-5552 Filed 3-15-11; 8:45 am]
BILLING CODE 6820-EP-P